With another new year comes another tax season. The IRS will probably begin accepting and processing returns sometime in late January, 2020. Here is a summary of some key tax rules that will help you plan your income taxes better.

The Penalty for Not Having Heath Insurance is Gone

Many people will be relieved to hear that the Obamacare penalty for not having qualifying health coverage is gone for 2019 tax returns filed in 2020. Further, a recent federal court case may result in dismantling many elements of the Affordable Care Act.

Section 179 Depreciation

This important deduction has been a life-saver for small business owners for many years and is available for 2019. Businesses may deduct up to $1,000,000 of the cost of equipment, tools, qualified real estate improvements and many types of vehicles. The deduction is phased out if you buy more than $2.5 million of equipment.

Meanwhile, 100% “bonus” depreciation continues for purchases of new or used property through 2022.

Which deduction should you claim? The best answer is to use a good accountant who will carefully consider all the angles and implications of using one or the other deduction. Your tax return is a puzzle and there is only one way to put all the pieces together such that you pay the legal minimum tax.

Business Vehicle Depreciation

Section 179 (and 100% bonus) depreciation can be claimed on business vehicles, but the rules are different. The most important fact which determines how much you can deduct is the type of vehicle you buy and its Gross Vehicle Weight Rating (“GVWR” – ask the dealer for this.)

Vehicle depreciation is important when you use the Actual Method to compute the deduction for business vehicles. If you use the Actual Method your total vehicle deduction will include depreciation, the cost of gas, repairs, insurance, interest on the loan, etc.

Standard Mileage Rates for Business Vehicles

Some people don’t use the Actual Method for vehicle expenses. Instead, they use the simpler Mileage Method and just multiply their business miles by the applicable IRS rate. (Vehicle excise taxes may be deducted in addition.) You can use the mileage method for up to four vehicles.

If you have more than four business vehicles you are required to use the Actual Method. For each vehicle you must choose a method at the time of acquisition and stick with it until you dispose of the vehicle.

For 2019 the rate for business miles was 58 cents (20 cents/mile for medical and moving activities and 14 cents/mile if you drove for a charity). 2020 rates were not available as this article went to press.

How can you decide which method is better? The short answer is that the Mileage Method is better if you acquire a cheaper car that will be driven many miles (low cost & high miles). The Actual Method is better if you buy an expensive vehicle but drive it only moderately (high cost & low miles.)

Finally, it’s important to note that whatever method you use for deducting business vehicle costs (actual or mileage method) the IRS requires you to keep contemporaneous documentation of all business use showing miles travelled, date, and business purpose. There are many smart-phone apps out there that assist in creating good records to corroborate your business vehicle deductions.

No More Tax Free Trade-Ins of Vehicles

The new tax law enacted in 2017 did away with most forms of like-kind exchanges where property could be swapped tax-free. Any business vehicle traded in for another business vehicle is now treated as a taxable sale, and gain (or loss) is recognized immediately.

No More Loss Carrybacks

Another change imposed by the new tax law eliminated net operating loss carrybacks, except in very limited cases. Under the former tax law if an individual had a net operating loss for the year he or she could carry the loss back to prior years and obtain refunds from the IRS. Now, such losses may only be carried forward and the amount of the loss that may be deducted in future years is limited.

No More Deduction for Alimony

For people who became divorced in 2019 the new tax law eliminated the deduction for alimony payments. And alimony income is no longer taxed. Individuals who divorced prior to 2019 may continue to follow the old rules which allowed for alimony deductions. But care should be taken not to significantly change a divorce agreement. Material modifications of a divorce agreement may cause the new tax law to become applicable to pre-2019 divorces.

Changes to How Retirement Plans and Pensions Are Handled

According to a recent article in the Wall Street Journal, Congress has approved the following key changes to retirement plans:

(1) 401(k) plans will be able to offer annuities as an investment product;

(2) Expansion of retirement plan coverage to small companies through cost sharing arrangements for pension plans;

(3) The age cap for contributing to an IRA (now age 70 and ½) is deleted;

(4) Required minimum distributions ("RMD") from pension plans must begin in the year you turn age 72 (previously RMD's were required to begin in the year you turned age 70 and 1/2.)

New Form 1040-SR For Seniors

The IRS has created a new, simplified Form 1040-SR for seniors age 65 and over. Use of the form is optional. Its purpose is to reduce the number of forms and schedules seniors with social security and pension income must file.

Don't Get Distracted by Formal Tax Rates

Many people get distracted by formal tax rates. Politicians love to point to published tax rates and make (usually false) claims that they have cut taxes. The truth is different. The actual tax you pay to the government is the product of two numbers: the tax rate multiplied by taxable income.

The tax rate could indeed be cut by a new tax law, but if the definition of taxable income is expanded then the net result could be the same or even a disguised tax hike. It's easy for people to look up tax rates. It is far more difficult to understand the very complex definitions of taxable income.

Speaking of tax rates here they are along with the 2019 standard deduction by filing status:

2019 Marginal Income Tax Rates and Brackets

2019 Marginal Tax Rates

Single Tax Bracket

Married Filing Jointly Tax Bracket

Head of Household Tax Bracket

Married Filing Separately Tax Bracket

10%

$0 - $9,700

$0 - $19,400

$0 - $13,850

$0 - $9,700

12%

$9,701 - $39,475

$19,401 - $78,950

$13,851 - $52,850

$9,701 - $39,475

22%

$39,476 - $84,200

$78,951 - $168,400

$52,851 - $84,200

$39,476 - $84,200

24%

$84,201 - $160,725

$168,401 - $321,450

$84,201 - $160,700

$84,201 - $160,725

32%

$160,726 - $204,100

$321,451 - $408,200

$160,701 - $204,100

$160,726 - $204,100

35%

$204,101 - $510,300

$408,201 - $612,350

$204,101 - $510,300

$204,101 - $306,175

37%

Over $510,300

Over $612,350

Over $510,300

Over $306,175

Standard Deduction

Filing Status

2018

2019

Single

$12,000

$12,200

Married Filing Jointly

$24,000

$24,400

Married Filing Separately

$12,000

$12,200

Head of Household

$18,000

$18,350

Remember that the very best answer for you is to always pay the legal minimum tax: not one cent more.

National Headquarters of the Internal Revenue Service, Washington DC. The inscription at the top of this building says:

Taxes are what we pay for a civilized society

2019 is the 107th year of the income tax in the United States, following ratification on February 3, 1913 of the 16th Amendment to the Constitution. See here for the very first U.S. income tax return for the year 1913:

Business Issues:

During the current Coronavirus global pandemic societies everywhere are confronting a stark choice between minimizing the harm caused by the virus and minimizing the harm caused by lockdowns and stay-at-home orders.

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